A sharp rise in European advisory work drove Goldman Sachs to its best quarter in investment banking since 2007.

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Investment banking, which houses Goldman Sachs’ financial advisory and underwriting businesses, reported a 13% rise in year-on-year revenues to $1.78 billion in the first three months of 2014. The rise came on the back of a 41% year-on-year increase in advisory revenues to $682 million.

The bank attributed the jump in advisory revenues to an increase in client activity in Europe.

Harvey Schwartz, chief financial officer at Goldman Sachs, said on a call with analysts that the investment banking backlog is up compared with a year ago, but down on the end of 2013.

He said of the current M&A market: “It's an environment where we're far enough away from the epicentre of the crisis where CEO confidence is at a point where strategic transactions are occurring.

"Large transactions can have a catalytic effect either on the industry or they create subsequent transactions themselves. So again, it could all change on a dime but right now the trajectory for merger activity feels pretty good.”

Net revenues from debt and equity underwriting stood $1.1 billion for the first quarter, compared to $1.08 billion a year ago. The first quarter’s flurry of initial public offerings as well as private placement work contributed to a 12% year-on-year rise in equity underwriting revenues to $437 million, which offset a 5% decline in debt underwriting revenues to $660 million.

On the trading side of the business, Goldman Sachs followed its Wall Street peers - with the exception of Morgan Stanley - in reporting a year-on-year fall in fixed income, currency and commodities. The 13% drop, excluding DVA, resulted in FICC revenues of $2.8 billion.

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Schwartz said that market volatility in the first quarter had presented opportunities for the bank’s commodities business, adding that the diversity of the business across rates, currencies, commodities, mortgages and credit had helped. He said: “I think it really reinforces that if you're going be in these businesses you really need the diversification.”

Equities trading also fell, with revenues of $1.60 billion in the first quarter, a 17% year-on-year drop it attributed primarily to the sale of its Americas reinsurance business. Excluding revenues from that business, revenues were down 6% year-on-year.

The bank’s asset management unit, which Schwartz called a “huge strategic priority” for the firm last quarter, enjoyed a 20% increase in first quarter revenues. Revenues rose to $1.57 billion during the period, boosted by higher management and incentive fees.

--Write to skrouse@efinancialnews.com or follow on Twitter at @bysarahkrouse